 | Integrated Risk Management
September 20-24, 2010 • RENÉ STULZ
CANCELLED
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This course presents a complete overview of the analysis, quantification and management of risks at the firm level that integrates lessons from the subprime crisis. The course is mainly focused on financial firms (including hedge funds), but also addresses many of the issues that are specific to industrial firms. The course considers market (equity, interest rates, foreign exchange and commodities), credit, operational and strategic risks. It emphasizes that risks are related, so that firms have to consider their risk exposure as a whole, and that risk management has to be designed to create value at the corporate level.
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Objectives: To provide participants with in-depth knowledge of risk identification, measurement and management techniques to implement an integrated risk management strategy. The course includes extensive real-world examples, case discussions and computer exercises where the participants will have the opportunity to work in groups. Throughout the week students work on case studies that require them to measure market, credit and operational risks separately and then to estimate firm-wide risk. The course discusses the experience of the following companies: AIG, Amaranth, American Barrick, Bank of America, Barings, Bear Stearns, Citibank, Credit Suisse, Enron, Freddie Mac, GM, General Re, Goldman Sachs, JPMorgan Chase, Lehman, Metallgesellschaft, Nationwide, Swiss Re, UCG and UBS. It includes a detailed discussion of the risk management issues that arose during the subprime crisis and presents a typology of risk management failures that the tutor published in the Harvard Business Review.
Podcasts: 1) Is Risk Management in Crisis? 2) Were risks properly managed? 3) Why is there a benefit at good training in Risk Management?
Target audience: Professionals involved in risk management, corporate finance, treasury management, strategy development, trading, hedging, fund management, risk control and financial institution supervision and auditing will find the course particularly useful.
Fees: The fee for this course is CHF 6.500 (incl. VAT). This covers tuition, extensive course material (including pre-course readings), lunches and an official cocktail and dinner.
Accreditation: CFA 36 CE credits
Key topics: VaR; capital allocation; risk capital; risk aggregation; risk management failures; hedging; credit risk; credit derivatives; counterparty risks; operational risk; business risks; strategic risk; liquidity risks; stress tests; Basel II; loss distribution; loss severity; loss frequency.
COURSE CONTENT
Monday
- Why risk management? What does value creation mean? Measuring value creation; how can integrated risk management create value? Reducing bankruptcy and distress costs; funding disruptions; taxes; stakeholder costs; managerial compensation and incentives; large shareholders; planning and renegotiation costs; benefits of risk culture; mapping the risks corporations face; market risks; credit risks; operational risks; political and regulatory risks; is there an optimal risk level? Marginal cost of bearing risk; marginal cost of reducing risk with derivatives and other tools.
- Implementing integrated risk management: Risk monitoring versus managing risk; strategic decisions; tactical decisions; the role of risk measures.
- How do we know that integrated risk management creates value? Empirical evidence.
Tuesday
- Measuring risk: Value at Risk; RiskMetrics™ approach; derivatives and VaR; Delta VaR; full valuation Monte Carlo approach; full valuation historical approach; empirical evidence; VaR versus other risk measures for institutional investors; VaR and regulatory capital; VaR in practice; fat tails; conditional VaR; extreme value theory: A nontechnical perspective; liquidity risks; model risk; stress tests; uncovering black holes; financial crises and market risk; marking-to-market with market dislocations.
Wednesday
- Risk management, credit and interest-rate risks: Measuring interest-rate risks; duration and convexity; duration VaR; interest-rate models; hedging interest-rate risks; using swaps; using caps and floors; measuring credit risks; Merton’s model; Duffie and Singleton and Jarrow and Turnbull; KMV; CreditMetrics™ and CreditRisk+; measuring default correlations; structured products; credit derivatives and hedging with credit derivatives; measuring and managing counterparty risks.
Thursday
- Operational risk: Definitions; the top-down approach; the bottom-up approach; distributions; measurement; Basel II and operational risk; empirical evidence; mitigation versus insurance.
- Measuring firm-wide risk: Using a risk measure to set the optimal amount of capital; measuring risk at the firm level; methods to aggregate risk; estimating a firm-wide loss distribution; correlations across risks; copulas.
Friday
- The practice of integrated risk management: Marginal VaR: Measuring the impact of a trade; component VaR; managing a trading desk with VaR; risk measures and investment policy; risk measures and performance evaluation; risk measures and compensation; risk measures and intra-firm capital allocation; first and second generation RAROC models; evaluating strategic risks.
- The limits of risk management: Additional lessons from the subprime crisis; a typology of risk management failures.
- Outlook: Issues to cover will be agreed upon in class.
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